Lansdowne Sees Bank Stocks Withstanding Libor Scandal
Traders at Lansdowne Partners LP, the biggest European hedge fund that invests in stocks, said banks will hold their value amid Barclays Plc’s (BARC) attempted rigging of interest rates as shares already reflect bad news.
“The underlying trading environment now looks increasingly stable for both U.S. and U.K. retail banks,” Stuart Roden and Peter Davies, co-managers of Lansdowne’s Developed Markets Strategy fund, wrote this month in a client letter obtained by Bloomberg News. “While clearly news flow is likely to remain volatile, we do feel that this kind of uncertainty is well- embedded in current investor thinking.”
Barclays, the second-biggest U.K. bank by assets, agreed last month to pay a record 290 million pounds ($447 million) for manipulating the London interbank offered rate. At least 12 firms, including Citigroup Inc. (C) and HSBC Holdings Plc, are under investigation, leaving investors and analysts concerned that others may face fines.
The FTSE 350 Banks Index (F3BANK) of six U.K. lenders has fallen 3.9 percent since June 27, when regulators in the U.S. and Britain announced the Barclays fine. The KBW Bank Index (BKX) of 24 U.S. lenders has dropped 0.6 percent.
Banks in Europe also have been hurt by the European sovereign-debt crisis and new rules that will force lenders to boost capital, contributing to a 25 percent slump in the 38- company Bloomberg Europe Banks and Financial Services Index during the past 12 months.
Lansdowne’s Developed Markets fund, with about $7.5 billion, gained 7.1 percent in the first half of the year, according to the letter. The London-based firm oversees about $11 billion total. Hedge funds that invest in stocks fell 2.9 percent on average through June 30 while all hedge funds climbed 0.9 percent, according to data compiled by Bloomberg.
The Developed Markets fund posted a 20 percent decline in 2011, hurt by investments in banks including Lloyds Banking Group Plc (LLOY), according to the letter. Roden and Davies said Lloyds, the U.K.’s biggest mortgage lender, was among their best performing companies in June, when the stock surged 23 percent. Andrew Honnor, a Lansdowne spokesman, declined to comment.
Lloyds’s legal claims stemming from the Libor investigation may reach 1.5 billion pounds, including private litigation, Cormac Leech, an analyst at London-based Liberum Capital Ltd., wrote in a July 11 note to clients. Investors have wrongly concluded that Lloyds is insulated from the probe because it has a small interest-rate derivative trading book, wrote Leech, who recommends that clients sell the stock.
Libor is determined by estimates from 18 banks including Barclays and Lloyds on how much it would cost them to borrow from one another for different time frames and in different currencies. It’s a reference for more than $350 trillion of assets ranging from interest-rate derivatives to mortgages.
The U.S. Commodity Futures Trading Commission, Justice Department and the U.K. Financial Services Authority alleged Barclays traders asked co-workers to offer Libor submissions that would benefit their swaps positions. Barclays also lowered its submissions during the 2008 credit crunch to mask the bank’s difficulty borrowing money, regulators said.
“Part of one’s frustration at recent events -- both behavior and political reaction -- was that it dominated more positive developments in the period, as central bankers rightly began to focus on lowering bank funding costs to stimulate recovery,” Roden and Davies wrote.
The portfolio managers said it’s ironic that “current policy in both Europe and the U.K. looks astonishingly close to ensuring that Libor rates are managed down from market-driven levels,” according to the letter.
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